Monday, December 28, 2009

Inheritance tax

The Conservative claim that 4 million people are liable to inheritance tax at a threshold of £325,000, assumes none of them have access to a solicitor. Here's why:

Terry and June, who have two children called Jack and Jill, own a house worth £500,000. If they do nothing, then when Terry dies, June will own the house on her own. No inheritance tax will be due at that stage, but when June dies, Jack and Jill have to pay inheritance tax on the full amount.

However, if Terry and June go to a solicitor, she can do something called "splitting the tenancy", which enables Terry and June to each leave their half of the house to their children. So, after Terry's death, June owns half the house, while Jack and Jill each inherit a quarter of the house from Terry. No inheritance tax is payable because Terry's share of the house, valued at £250,000, is below the inheritance tax threshold. When June dies, her half of the house is also left to Jack and Jill, but since it is also worth £250,000, it is still below the inheritance tax threshold.

So the Tory claim should be amended to 4 million people are liable to inheritance tax, but only if they don't trust their spouse, or their children, or have a phobia about lawyers.


Anonymous said...

This is garbage. Current rules allow any unused nil rate inheritance tax band to be transferred between spouses and registered civil partners. This applies as long as the 2nd partner dies on or after 9 Oct 2007.

If Terry died first and left his estate to his wife then it is exempt from inheritance tax - i.e. his nil rate band is not used up at the time of death.

When his wife dies Terry's unused nil rate band can be transferred to her estate - so her estate would qualify for an exemption of twice whatever is the nil rate band at the time of her death.

If Terry left part of his estate to people other than his wife that would use up a percentage of his nil rate band. Any unused percentage can still be transferred to his wife's estate.


Jane said...

Thanks. I wasn't aware of the 2007 amendment. In that case, the Tories are even more wrong about the number of people affected by inheritance tax, since the threshold for couples is effectively 650,000.

Anonymous said...

The number may no be that off as the number of couples where one partner has died since 9/10/07 is likely to be less than those where one partner died earlier.

I think you hit the problem on the head but against the Labour argument. The very rich can afford the legal advice to avoid inheritance tax it is those in the middle who live in family houses in the south east or nice areas of certain other cities but are not so wealthy as to ab able to afford the constant tweeking of their arangements to keep their inheritance tax free.